Seed Investing: Understanding The Landscape - Part II

In this second post of our three-part blog series on the different types of seed instruments we will explore Series Seed.

Series Seed documents were introduced by startup lawyer Ted Wang and venture capital firm Andreessen Horowitz as a standard for priced seed rounds. They intended to reduce the cost and time of seed investments, while at the same time providing fair and reasonable terms for both the investor and the founders.

Before the introduction of Series Seed, companies used full-blown Series A documents for preferred stock issued in a priced round. In a Series A financing, the investors, as preferred stockholders, typically get preferential treatment over common stockholders with respect to payment of dividends, amounts distributed in case of liquidation, voting rights, anti-dilution protections and/or redemption.

Series Seed documents introduced a trimmed-down version of the Series A preferred stock terms and imposed fewer restrictions on the day-to-day operations of the company. Unlike Series A documents, Series Seed documents do not include preferential dividends, redemption rights, anti-dilution protections (although some investors ask for them to be included) and registration rights. Series Seed documents also have more lightweight protective provisions, information rights, and representations and warranties than Series A documents. Since the investors come in at a valuation (unlike in a convertible note), a company using Series Seed documents has to make sure that the option pool is set up, since the pre-money valuation will also take into account an option pool.

Pros of Series Seed

Efficiency and cost reduction. Series Seed documents have cut the cost of financing by reducing the number of documents involved. The standard terms serve as a fill-in-the-blank, which limits the need to negotiate and makes the process quicker. Series Seed also introduced a standard legal cost$10,000so no surprises with the legal bill at the end of the round. Pro-founder terms. The Series Seed documents come with a standard 1X non-participating liquidation preference, which is the most founder friendly of the liquidation preferences. They also did away with terms like anti-dilution that are not relevant at the early seed-stage funding. Set valuation and aligned interest. Since a Series Seed financing is a priced round, investors and founders have to agree upon a valuation. This agreement provides certainty as far as stockholding, dilution in future...